Options, Futures, and Other Derivatives, Ninth Edition

Chapter 14 Wiener Processes and Itô’s Lemma

Any variable whose value changes over time in an uncertain way is said to follow a stochastic process. Stochastic processes can be classified as discrete time or continuous time. A discrete-time stochastic process is one where the value of the variable can change only at certain fixed points in time, whereas a continuous-time stochastic process is one where changes can take place at any time. Stochastic processes can also be classified as continuous variable or discrete variable. In a continuous-variable process, the underlying variable can take any value within a certain range, whereas in a discrete-variable process, only certain discrete values are possible.

This chapter develops a continuous-variable, ...